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    Joe's Plain-o Bikes makes basic single-speed bikes that it sells to bike shops for $75 each. Joe's costs to make each bike are $25 for materials and $25 for overhead. Joe's profit per bike is $25, calculated as the selling price ($75) minus total costs ($25 for materials + $25 for overhead). The producer surplus per bike is $50, calculated as the difference between the maximum Joe is willing to receive ($25 minimum to cover costs) and the actual selling price ($75). While profit incorporates total costs including overhead, producer surplus only considers the direct costs of production and not fixed overhead costs. This explains the relationship between the two numbers.

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    Joe's Plain-o Bikes makes basic single-speed bikes that it sells to bike shops for $75 each. Joe's costs to make each bike are $25 for materials and $25 for overhead. Joe's profit per bike is $25, calculated as the selling price ($75) minus total costs ($25 for materials + $25 for overhead). The producer surplus per bike is $50, calculated as the difference between the maximum Joe is willing to receive ($25 minimum to cover costs) and the actual selling price ($75). While profit incorporates total costs including overhead, producer surplus only considers the direct costs of production and not fixed overhead costs. This explains the relationship between the two numbers.

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    Joe's Plain-o Bikes makes basic single-speed bikes that it sells to bike shops for $75 each. Joe's costs to make each bike are $25 for materials and $25 for overhead. Joe's profit per bike is $25, calculated as the selling price ($75) minus total costs ($25 for materials + $25 for overhead). The producer surplus per bike is $50, calculated as the difference between the maximum Joe is willing to receive ($25 minimum to cover costs) and the actual selling price ($75). While profit incorporates total costs including overhead, producer surplus only considers the direct costs of production and not fixed overhead costs. This explains the relationship between the two numbers.

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    30 views3 pages

    Answer

    Uploaded by

    Drog
    Joe's Plain-o Bikes makes basic single-speed bikes that it sells to bike shops for $75 each. Joe's costs to make each bike are $25 for materials and $25 for overhead. Joe's profit per bike is $25, calculated as the selling price ($75) minus total costs ($25 for materials + $25 for overhead). The producer surplus per bike is $50, calculated as the difference between the maximum Joe is willing to receive ($25 minimum to cover costs) and the actual selling price ($75). While profit incorporates total costs including overhead, producer surplus only considers the direct costs of production and not fixed overhead costs. This explains the relationship between the two numbers.

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    © All Rights Reserved
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    profit of 25
    surplus will be 50
    The relationship that exists between these two numbers refers to the element of fixed costs.
    Step-by-step explanation
    MBA 5010 Week 6 Weekly Assignment

    Joe's Plain-o Bikes makes and sells a single model of a basic single speed bike. Joe sells the bike
    to low-end bike shops for $75. They in turn retail the bike for $150. Joe's cost of making each
    bike is $25 and his overhead averages out to around another $25. Answer the following:

    Question 1 - What is Joe's profit (or margin) per bike?

    The profit is found by subtracting the selling price from the cost of making the bike. Selling price
    (75) - cost(25) - overhead(25) will make Joe have a profit of 25.

    Question 2 - What is the producer surplus per bike?

    The producer surplus is determined as the difference between the maximum value Joe is willing
    to receive for the bike with what they receive. According to Joe's model, the least amount he is
    ready to receive is 25, which relates to the cost of manufacturing. Since he gets 75, the producer
    surplus will thus be 50.

    Question 3 - Explain the relationship between these two numbers.

    The relationship that exists between these two numbers refers to the element of fixed costs. The
    producer surplus does not incorporate the expenses that do not change with the quantity of goods
    produced. In the above problem, overhead is not captured in finding producer surplus but
    determine the economic profit Joel will make.
    In the example of the Meanwells, we saw that, at a price of zero, consumer surplus was
    maximized. But there was no producer surplus. Producer surplus then increased as they raised
    price.

    Question 4 - Explain why there is a price, above which increasing price actually reduces
    producer surplus.

    When the price of a product is at zero, producers are not willing to supply a product since there is
    no incentive to that. Upon increasing the prices above zero, the producer surplus will increase up
    to a certain point where it will start decreasing. In a demand curve, the shifts are linked to
    producer surplus. If the shift moves to the left, it shows a reduction in demand; the producer
    surplus will decrease despite the price of the commodity being above zero.

    The bus service the Meanwells began is the only one in their small city. We'll also assume there's
    no other alternative form of public transportation. For each of the following determinants of
    elasticity, evaluate the price sensitivity of their bus service at a price of $3 per ride.

    Question 5 - Substitutability

    The lee price of the bus fare exhibits perfect inelastic demand as the demand for using public
    transport does change with price changes. When prices change, the substitution effect is very low
    due to the nature of the service.

    Question 6 - Need

    The people of the small city do not alter their needs depending on the price changes of bus fares.
    If the need for consuming public transport does not change despite changes in prices.

    Question 7 - Proportion of Budget


    If the price changes, the budget changes with the type of price movements imposed. If prices
    increase, the budget on the consumer will increase while the business will become more
    profitable. A considerable increase in prices will, however, reduce the demand for the service
    with a small impact but will have more revenues achieved.

    Question 8 - Are there any proactive steps the Meanwells might take to reduce the price
    sensitivity of their bus service so they can increase the price charged?

    The proactive actions that can lead to more revenue with an increase in price include the aspect
    of improving quality with less available seats. The bus can customize its seats to have better
    services with an increase in price hence leading to more revenue. Offering a distinct service will
    increase the revenue with the service remaining perfectly inelastic.

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